The end of financial year can be a frantic time for SMSF trustees as they scramble to get in last minute deductions and ensure the paperwork for their fund is in order. It is a good idea to be on the front foot with SMSF clients to ensure they have everything in order as there can be significant ramifications for the current year and beyond.
Here are some tips to help SMSF trustees optimise their superannuation contributions and general positions ahead of the end of the financial year.
Existing income streams
Fund trustees with an income stream need to ensure the minimum pension payment is made before 30 June. This pension payment must be debited from the fund’s bank account by 30 June. Failing to do this could result in severe tax implications.
Event-based reporting
SMSFs have new reporting obligations. This is due to the new transfer balance cap measure – the transfer balance account report (TBAR) – and event-based reporting framework, which allows the ATO to record and track a member’s balance for both their transfer balance cap and total superannuation balance.
Most of the events that need to be reported will generally not need to start until 1 July. However, if an SMSF member has a pre-existing income stream, it must be reported to the ATO on the TBAR on or before 1 July.
A pre-existing income stream is an income stream the member was receiving on 30 June 2017 that continued to be paid to them on or after 1 July 2017, and is in retirement phase. If a fund fails to report by the required date, a failure to lodge penalty may be imposed by the ATO.
Take advantage of super contributions
Concessional contributions
SMSFs wishing to take advantage of the tax benefits of concessional superannuation contributions, such as salary sacrifice and/or concessional member contributions, should ensure contributions to their fund are made before 30 June, keeping the $25,000 cap in mind. Any superannuation guarantee (SG) payments received are also included in this cap. Excess contributions are taxed at the individual’s marginal rate less a 15 per cent contributions tax offset.
A change for individuals who are not self-employed is that personal contributions can be claimed as a deduction (without having to salary sacrifice). This is beneficial for people who have a capital gains tax issue or those who did not set up a salary sacrifice arrangement with their employer.
Another key change to the concessional contribution rules from 1 July is that unused amounts under the contributions cap can be carried over into successive financial years on a rolling basis for up to five years. However, this option is only available to individuals with a superannuation balance of less than $500,000.
From 1 July 2017, division 293 tax applies to any member of the fund who earns more than $250,000 ($300,000 prior to 1 July 2017). This means an extra 15 per cent contributions tax will be charged on the whole or part of their concessional contributions, such as the SG charge, salary sacrifice and personal deductible contributions.
Non-concessional contributions
Non-concessional (after-tax) superannuation contributions are capped at $100,000 for the 2018 and 2019 financial years. Excess non-concessional contributions are taxed at the top marginal tax rate of 45 per cent unless they are withdrawn prior to 30 June.
Consider the bring-forward rule for non-concessional contributions
The bring-forward rule is beneficial for SMSF members wanting to make non-concessional contributions over and above the $100,000 annual cap. Essentially, the rule allows individuals who exceed the $100,000 cap or trigger the bring-forward rule to bring forward their contributions for the successive two years to a maximum of $300,000. This only applies if the rule was not triggered in the previous two financial years where transitional arrangements apply due to the changing of the caps. Contributions under the bring-forward rule are still subject to the $1.6 million pension cap.
To benefit from the bring-forward rule, you must trigger it either before you turn 65 or before the end of the financial year in which you turn 65. So, if you have a client who has reached age 65 this financial year, you have until 30 June 2018 to use the bring-forward rule for the last time, provided they meet the work test.
Individuals aged over 65, but under 75, who are seeking to make a non-concessional superannuation contribution must satisfy the work test. The work test stipulates that an individual must work at least 40 hours within not more than 30 consecutive days in a financial year in which they plan to make a non-concessional superannuation contribution.
The government has proposed to change the work test rules from 1 July 2019. The proposal is for an exemption to the work test for individuals aged 65 to 74 with superannuation balances of less than $300,000 for 12 months from the end of the financial year that they last satisfied the work test.
Consider spouse contributions and contribution splitting
Spouse contribution
Spouse contributions involve one spouse making an after-tax contribution to their spouse’s superannuation account. A key advantage is an 18 per cent tax offset on after-tax contributions, up to a maximum of $3000, to a spouse’s superannuation account if the receiving spouse earns less than $37,000 in a year (the lower threshold).
For example, a maximum $540 tax offset is received by the contributing spouse if an after-tax contribution of $3000 is made. The tax offset then progressively reduces to zero when the receiving spouse earns $40,000 (the upper threshold) in a year.
Contribution splitting
The introduction of the $1.6 million pension cap on 1 July 2017 has made the strategy of splitting superannuation concessional contributions with a spouse more attractive. If an individual is nearing the $1.6 million lifetime cap on transfers to tax-free retirement accounts at 30 June, they can transfer a portion of their concessional superannuation contributions to their spouse to ensure they remain under the cap.
Contribution splitting involves having one spouse’s eligible concessional contributions transferred to their spouse’s superannuation account. For SMSFs, a contributions split must be allowable under the fund’s trust deed.
The strategy can also enable a younger spouse to access (via the older spouse’s super fund) their superannuation earlier. However, there are certain conditions to be mindful of:
- the receiving spouse must be under 55 years of age, if retired, or between 55 and 65 if they are still working. The contributing spouse can be of any age,
- a maximum of 85 per cent of employer contributions can be transferred in a year,
- non-concessional contributions cannot be split with a spouse, and
- both spouses must be Australian residents.